ASSET BASED LENDING

What's the difference between an asset-based loan and traditional bank financing?

The main difference between asset-based loans and standard bank financing is what the lender looks to first for repayment of a loan. A bank will look first to the cash flow for the repayment, then to collateral. An asset-based lender looks to collateral first. Since banks underwrite cash flow as their primary repayment source, they typically require less collateral controls and monitoring but more financial covenants.

For "asset rich" companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers. Assets are not limited to real estate. They may include accounts receivable, fixtures and equipment and patents. In the case of valuable equipment, an asset based lender will file a UCC lien on the equipment similar to filing a lien on a real estate to be sure it is not sold or financed without being repaid first.

An example of a primary candidate for an asset based loan, would be a company holding industrial real estate, that may not currently be occupied or planning to be occupied in the near future. It might be ripe for conversion to retail, office or to sell and redevelop the land. To get to that point, a company might need a loan based on the current physical assets of the property. A bridge loan or long term loan depending on the time frame needed to accomplish the financial goals of the owner.

Where traditionally a bank would find this loan a problem, and asset based lender would value the property based on the potential resale of the building and land. It might be conservative in the eyes of the owner, but will typically reflect a 30-60 day sale price. Typically large properties take longer to sell, however lenders use a more realistic approach to assuring return of capital to their investors.

An unoccupied warehouse might be appraised for a quick sale value of 65 to 80 percent of it's full value if marketed over a longer time period. The lender and or investors would likely lend no more than 65% of that reduced value. In some cases not more than 50%.

To a property owner it might seem like it is impossible to gain more than 35 - 45% of the properties value in terms of financing. To improve terms, the owner might have to refinance when the building is leased. If the purpose was to sell after fixing up with asset based lending cash, then the owner will have accomplished their goal.

Interest rates are typically similar to those of bridge loans in which the loan is generally sought to stave off problems, or to use short term. Either of those scenarios requires a higher yield to investors.

The types of lenders that make asset based loans are typically private investors, private funds, or portfolio lenders, who do not have strict restrictions by stockholders.